How to tell if you’re over-trading

A trading forum poster recently asked the question “How do I know if I’m over-trading”. Over-trading is a trap many of us fall into, especially during our early developmental stages in the markets. At that point we haven’t gotten a hold on the emotional side of things quite yet (though sometimes we don’t even realize it), so feelings like greed, excitement, boredom, etc. drive us to over-trade at times.

I look at over-trading in two ways. One is trading too big. The other is trading too often.

Over-trading by trading too big
Risk management is obviously a major factor in one’s chances for trading success. Each of us needs to find the risk level which suits us and our style of trading. That may be 1%. That may be 10%. Some folks like to say you should trade just below the point where you’d have trouble sleeping at night.

A somewhat more empirical way of knowing whether you’re over-trading in terms of size is to look at the period-to-period volatility of your trading equity. And don’t just think in terms of losses. Large gains are just as indicative of trading too big as large drawdowns. If you’re account jumps 10% in a single day (assuming it isn’t because of an extraordinary market move), that’s a pretty good indication your trade(s) is/are over-sized. Sure, a 10% one-day gain sounds great, but the problem is it means you could probably just as easily take a loss that size.

Over-trading by trading too often
The issue of trading too frequently is one that can get a bit more complicated to diagnose. It’s not just a question of the number of trades you do. It’s a question of the quality of those trades. One trader could trade 100 times a week and not be over-trading while another trader could trade 5 times a week and be doing too much.

Lots of different things motivate over-trading in this fashion. I think they can mainly be resolved by asking the question “Am I looking for a trade or am I waiting for a trade?”

If you are looking for trades then you are subject to all the emotions that get you to enter positions when you probably shouldn’t. These include really dangerous mindsets such as thrill seeking and revenge trading. This puts you at risk of taking bad trades just for the sake of doing something.

What are your experiences with over-trading and how did you get yourself back on track?

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